For the second December in a row, the Fed increased its key rate to a target of .5 percent to .75 percent. This is about a .25 percent increase from its previous target. Remember the Fed key rate pertains to the rate of interest paid by lending institutions borrowing funds overnight from each other. This rate increase, in addition to the presidential election, is helping to influence a rise in mortgage rates. Mortgage rates increasing isn’t a surprise, but the rate at which they have increased is. The 10-year Treasury yield influences mortgage interest rates directly and this yield has increased from 1.82 to 2.59 in the last six weeks.
That’s a scorching pace. We’ve seen rates increase by about .75 percent during this time. On average, about every 10 to 15 basis points worth of movement on this yield equates a .125 percent change in mortgage rates. For example, when the 10-year bond was trading at a yield of 1.82 percent, the rate on a 30-year fixed was 3.75 percent. When that bond yield increased and surpassed 1.95, the rate on a 30-year fixed rate increased to 3.875 percent.
Most people tend to think that higher interest rates for mortgages is a bad thing. But that’s not all true. The negative is obvious; the same loan today costs more than it did before. However, the difference isn’t drastic.
What people may not realize is that there are positives with higher rates like increased buying power and a more balanced real estate market. With rates well below 4 percent last spring and summer, there were many more buyers than sellers. This made competition for good homes fierce, and it sent home prices soaring.
If you’ve been discouraged by the rate hike as you contemplate making a home purchase, don’t fret. I’ve put together an example of the difference between buying a home at the high-end of the market with lower interest rates and buying the same home for 5 percent less (in a more balanced market) but at a higher interest rate. For this comparison, the buyer will have a 5 percent down payment and a 30-year term.
Unbalanced Market / Low Rates:
- Home price: $275,000
- Down payment (5 percent): $13,750
- Loan amount: $261,250
- Interest rate: 3.75%
- Loan payment (excluding escrow): $1,210
Balanced Market / Higher Rates:
- Home price: $261,250
- Down payment (5 percent) $13,050
- Loan amount $247,950
- Interest rate: 4.375%
- Loan payment (excluding escrow): $1,237
The net difference is $27 each month. Not too shabby considering the difference in rates in this example is .625 percent.
It’s my opinion that rates will temper in the coming weeks and months. The Mortgage Bankers Association forecasted that rates on a 30-year conventional loan would be about 4.3 percent in the first quarter of 2017. This serves as proof that economic indicators pointed in this direction. We arrived a little early to this target but I believe we will be steady moving forward.
It’s important for you to know your buying and borrowing power during times of market volatility. If you’d like to explore several different scenarios and discover the best options for your personal financial situation and homeownership goals, give me a call. Consultations are always free, and I enjoy nothing more than surprising my clients with good news about attaining the home of their dreams.
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268